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Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. On today’s daily call, we are going to answer the question – “Can one big losing options trade wipe out your account?” The short answer to this is maybe. I’ll say this real quick before you exit the podcast and stop listening. It’s that it definitely, 100% is determined upon your trade size. I would say if you’re listening to what we do and we say 1% to 5% of risk per trade, then one big losing trade should never wipe out your account, really never wipe out your account. Now, I’ve seen a lot of people where they have had their accounts totally wiped out and guess what? They should, frankly speaking. I’m speaking to you if you’ve had these big trades and you know that they’ve been big trades and you got greedy and you know you got greedy. Don’t lie to me and tell me that you didn’t know it was going to happen, that you assumed it wouldn’t happen. That’s like taking all of your wealth and buying lottery tickets and assuming that you’re going to win and then getting mad when you don't win the lottery. That’s what people are trying to do. The reality is that if you had a big drawdown because of the position size, it was your fault and you just need to own up to it and now realize that you have to control your position size. Here's why I say that there is probably no chance that it actually happens. It’s all based around math. There’s no theory in this, in that “I assume this is going to happen” or “Here’s why.” It’s just a simple math game. That’s what options trading ultimately is anyway. What we suggest… I’ll start with the basis of this. What we suggest is 1% to 5% of risk per ticker symbol. That’s what I started saying, risk per ticker symbol. Apple call can never risk more than 5% of your account. Google can never be more than 5% of your account. SPY, IWM, the Qs, any of these symbols that you want to trade. Any ticker symbol that you trade can never be more than 5% of your account. To use some raw numbers, if you have $10,000 in your account to trade which is the average brokerage account that’s opened, that means that $500 of risk can be associated to each individual ticker symbol that you trade. If you’re trading Apple and you buy shares of Apple, you’re allocating more than 5% of your account to Apple. Now, people do this all the time where they trade way too large and when they win, they feel really good about themselves. They have this false sense of success because they’re trading way too large and they’re winning and that fuels the cycle of trading way too large even more, so that when they lose, they feel like they’ve been cheated, they feel like they don’t know what happened. The reality though is that those wins cannot continue on forever. You’re going to have some distribution of profits. There’s no free money in the market. There’s no free lunch. You can’t keep winning while you're taking on an insane amount of risk and not feel like there’s any downside to that. But still, if you have a $10,000 account, then Apple should represent 5% of that account or at the most, 5%. You could do a spread and you could definitely do less than $500 of risk and trade Apple or practically any security out there. You can do a $5 wide spread and have less than $500 of risk in that account. Now, the reason I say this is because of the probability of consecutive losses. When we look at a table… We’ve got some of these tables inside of the training platform. You’ve probably even been through the trading before, but it’s good to hear again. When we look at the probability of consecutive losses which is what ultimately blows up an account, an account gets blown up because you have a series of losses that lead to losing trades, like losing your account balance. Let’s look at it on the furthest spectrum because I think it’s really good to look at it at the nth degree basically on either end. Let’s say that you allocate 50% of your account to one single option trade, 50% of your account to one single option trade and that option trade is a 50-50 coin toss, meaning you're buying options directionally, you’re doing a spread directionally. You either make money or you don't, basically. You either have a payday or you don’t. In that case, if you take it to its most nth degree on one end of the spectrum, on the left side of the spectrum if you want to think about it that way, if you lose on that trade, your account value goes down by 50%. One trade, one loss, down by 50%. I truly see this actually more often than not. It’s not necessarily always 50%, but I get people who email me and they say, “Kirk, I have this really bad trade.” They know why now, but they say, “I allocated 40% of my account and now I’m [Inaudible] because it was only $800.” But they had $1600 in their account and they say, “It’s only $800 and I thought I was going to win big.” You know, the whole story that you probably heard before over and over again. But that’s the risk. The risk is that at a 50% chance of success trade which is ultimately what you’re trading, you've got a one in two chance of losing on that trade and that's really tough because if you’re allocating 50%, then one out of two times, you could lose 50% of your account balance. That to me is an insane amount of risk, but some people take that. Now, the problem with this is that if somebody wins on that first trade, again, they have a false sense of success. Their allocation or their sequence of returns started off really well, that doesn't mean that it’s going to end really well because if you keep trading on that path and let’s say you make 50% on your account, the likelihood is you’re going to continue to trade at that risk level, meaning you’re still going to continue to allocate 50% of your account. Just as easily as you made the money, you can give it right back. Anybody who’s ever gone to a casino, anybody who’s ever played slots or card games, you know you can be up $200 and give it all right back very quickly. That's the risk in doing that. What we suggest is we suggest you be on the opposite end of the spectrum in all avenues, meaning dramatically less position size, a higher probability of success and more frequency of trades. Let’s say now that your probability of success is 70% versus 50%. You sell options, you have a 70% chance of success and if you only do this on one side of the market and let's say that you're allocating 5% of your account to an individual trade, so instead of doing 50%, you’re allocating 5% of your account to that individual trade. Well, the likelihood that that 5% causes your account balance to basically go down to zero is one in 28 trillion. Let me say that again because that number is very powerful. The likelihood that a 5% trade in your account consistently loses or even has just one big loss that wipes out your account at a 70% chance of success level is one in 28 trillion. The reality, folks, is that if you trade small position sizes and force the market to consistently and religiously move against you, it will never do so. I would even dare to say that that number that I even gave you was on a one-sided trade. That’s assuming that all your trades are on the same side of the market that you never have balanced risk and reward, meaning that you never are trading bullish and bearish at the same time which is something that we suggest you do, that you’d be neutral around the market. It’s an insanely low probability of totally blowing up your account or wiping out your account with one big losing trade. Now, can one big losing trade cost you to lose 5% of your account? No doubt. If you’re not comfortable with that, if you’re not comfortable with losing 5% of your account… This really happens mostly with accounts that are on the smaller end of the spectrum. One losing trade could be $500 and that’s a lot for somebody who’s trading a $10,000. I get that. Don’t make a trade that’s $500 of risk. I mean, I don’t know whatelse to say. It’s probably as simple as that. If you're not comfortable… I always tell people this. If you can’t sleep at night, assuming that you could lose on that trade, your position size is too big. If your trade-off here is – “If I can sleep, my position size is okay. If I worry about it for any reason, my position size is too large and I need to make smaller trades.” Probably the smallest trade that you could make… Just to give you guys an idea of this. You can make a $1 wide credit spread trade for probably $70 of risk. If $70 of risk is too much for you for one trade and one ticker symbol, then you need to save up more money until you have more money to trade. It’s really that simple. That’s how simple it is. But if $70 is not… Like if you can sleep at night knowing “Hey. If I lose $70 on this trade, I’m okay.” Then that’s a good position size for you. Then you start [Inaudible] that up until you’re comfortable at whatever range you’re comfortable in. I personally am still comfortable even with my account size being multiple hundred thousand dollars. I’m still comfortable in the 1% and under range. I rarely get to 5% ever. Probably the only time I would get to 5% is if the VIX was back at 80 or 90 or 100 and the market was just giving us money because we were in a crash scenario. That’s probably when I would scale up on the higher end. But otherwise, I’m going to be very small with my positions because if I lose a couple of hundred dollars, I’m totally okay with that. I know it’s part of the system. It’s part of the process. But no one big losing trade is ever going to wipe me out because I don’t allocate enough money to any one ticker symbol consistently at the same time without any other positions that that would cause an undue stress on my account and my portfolio. Hopefully that concept makes sense. I know I went on a little bit longer than I necessarily wanted to in this podcast, but I think you guys understand the concept here, is that one losing trade could wipe you out for sure if you’re allocating too much to it. But if you know now and if you’re listening to this now, there should be no possibility for one big losing trade to totally wipe out your account. Could it hurt? For sure. It could sting. It could be a bee sting on your account for sure, but it’s never going to wipe you out. It should never wipe out the system that we’re building where we’re selling high implied volatility and taking advantage of the implied volatility edge in the market. As always, hopefully you guys enjoy these. If you have any comments or questions, let me know. Until next time, happy trading!